1. Field of the Invention
The present invention relates to the financial vehicle known as the variable annuity contract. More particularly, the present invention relates to a system for and method of variable annuity contract administration.
2. Description of the Prior Art
When an individual retires and no longer collects a salary, he or she needs a way to be able to maintain the same quality of living as he or she enjoyed prior to retirement. Through the purchase of annuity contracts, individuals are provided with an opportunity to meet their retirement needs. As those of ordinary skill in the art know, an annuity is an insurance contract issued by an insurance company whereby the contractowner can obtain future payments based on the value at retirement of amounts paid into the annuity by the contractowner. Depending upon the payout option chosen, this stream of payments can be for life, for life with a period certain, for a certain period of time, etc. There are many payout options available with annuities.
There are generally two types of individual annuities, fixed and variable. With a fixed annuity, interest will accrue on monies paid in by the contractowner at a rate set by the insurance company during the accumulation phase. Taxes are deferred on the accumulated interest and annuity payout options are available. With a variable annuity, the contractowner can make deposits into a variety of mutual fund subaccounts offered through the annuity, defer the taxes on income and gains from these funds, and convert the funds to an income stream for the rest of the contractowner's lifetime. In recent years, the variable annuity has become the more popular type of annuity contract.
A variable annuity contract has two phases. The first phase of the contract is the accumulation phase of the contract. The second phase of the contract is the payout phase of the contract. During the accumulation phase of a variable annuity, deposits can typically be made regularly or at the discretion of the contractowner and directed into any number of the underlying mutual fund subaccounts. Further, these balances can be moved from one fund to another at the discretion of the contractowner. Generally, a death benefit is also provided which pays the greater of the accumulation value of the contract or the total premiums paid into the contract less any withdrawals taken. There are also other, more liberal, death benefits in many contracts.
In the payout phase, the contractowner has a choice of a number of different payout options. For example, the payout may be a life annuity with a guaranteed period or a life annuity with period certain. The various payout options protect the contractowner from the adverse consequences of living too long and outliving his or her money.
As the variable annuity has evolved and as variable annuities have become more popular, there have been many innovations in this area. Various types of death benefits, living benefits, guaranteed minimum income benefits, bonus investment credits for the contractowners at issue, disability benefits, etc., have been developed. In the current variable annuity contract marketplace, there are many different variable annuity contracts with many different features, and it is expected that there will continue to be many innovations in the variable annuity field and many more additional product features in the future.
A recent innovation in the field of variable annuities has been a bonus investment credit. A bonus investment credit is money that is paid into the annuity by the insurance company which issues the annuity contract at the time premium payments are made. The bonus investment credit is usually some percent of the premium that is paid into the contract by the contractowner. For example, with a 3% bonus investment credit, if a deposit of $100,000 is made by the contractowner, an additional $3,000 would be credited by the insurance company to the contract. The bonus investment credit has proved in the marketplace to be a valuable feature to potential contractowners. However, the implementation of the bonus investment credit in an annuity contract has typically resulted in higher penalties for withdrawals of money from the annuity by the contractowner.
Another area which has evolved in the variable annuity marketplace is the payment of commissions to distributors who sell variable annuities. Commissions can be paid to distributors up-front on premium deposits, partially up-front and partially in the renewal years, or as asset-based compensation. Asset-based compensation is defined as compensation which is paid as a percentage of the accumulated value of the contract. However, in the first year, the compensation will be paid as a percentage of the premium paid. This is because during the first year the premium has not had time to accumulate significantly and thus there will be no substantial difference between the premium paid and the assets of the contract.
From the contractowner's point of view, assuming that the compensation is actuarially equivalent, annuities that pay asset-based compensation to distributors are generally better. For example, assume that the commission is paid up-front and that there is no further compensation forthcoming from the contract to the distributor. In that situation, the distributor might try to convince the contractowner to move the money that is in his or her current annuity contract to a different annuity contract, thereby entitling the distributor to another up-front commission payment. This would often not be in the best interests of the contractowner as the contractowner would have a new set of withdrawal charges with the new contract.
With respect to commissions, annuities can generally be categorized into two classes: (1) those annuities which pay commissions to distributors and (2) those annuities which do not pay commissions and are sold directly to contractowners through 800 numbers, over the Internet, etc. While, in general, annuities that do not pay commissions are cheaper for the contractowner, the contractowner of the annuity that pays commissions receives service and guidance from the distributor and thereby, theoretically speaking, is able to make better informed decisions concerning the variable annuity and his or her retirement needs.
Bonus investment credits have been particularly popular with prospective contractowners with both the class of annuities that pays commissions and the class of annuities that does not pay commissions. Within the class of annuities that pays commissions, there are a number of annuities that pay a bonus investment credit. However, currently all of these annuities have withdrawal charge percentages that are higher than the bonus investment credit percentage that is provided to the contractowner and that are considered to be high in the annuity marketplace.
Withdrawal charges are a feature of variable annuities that should be closely examined by a prospective contractowner. Withdrawal charges are a percentage of the amount withdrawn and apply for a certain period of time. Significant penalties for withdrawals and long periods of time for which withdrawal penalties apply are features of variable annuity contracts which can limit the flexibility of the contractowner. For example, in the case of a variable annuity that has a bonus investment credit and that pays commissions, typical withdrawal charges would range from 6% to 9% of the amount withdrawn in the first year and would apply for a period from six to ten years. The withdrawal charges would decrease over the period of time during which charges apply.
Although there are many different types of variable annuity contracts in the marketplace, there has not been a variable annuity contract designed to pay a bonus investment credit to the contractowner where (1) the withdrawal charge percentages in all contract years are less than the bonus investment credit percentage and (2) commissions are paid to distributors. Currently, variable annuity contracts that pay commissions and have a bonus investment credit also have withdrawal charge percentages that are significantly greater than the bonus investment credit percentage. There are also commission-paying variable annuity contracts that have lower withdrawal charges but that do not have a bonus investment credit. Neither of these options would be as attractive to a prospective contractowner as a variable annuity that includes both a bonus investment credit and withdrawal charges which are not greater than the bonus investment credit.
It is clear from the foregoing discussion that variable annuity contracts are complex insurance vehicles. Because of this complexity, it is desirable to provide a system and method which can be used to facilitate the administration of variable annuity contracts expeditiously and efficiently. Additionally, because of the large amount of competition among issuers in the variable annuity market, it is desirable to provide a system for and method of administering variable annuity contracts which are more efficient and consumer-oriented than other variable annuity contacts in order to attract more would-be contractowners and thereby gain a competitive advantage in the marketplace.